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Brussels decides against fining Portugal, Spain

Spain and Portugal should not be fined for failing to take “effective action” to correct their budget deficits, the European Commission announced on Wednesday.

EU finance ministers can still amend or reject the Commission’s recommendation in the next 10 days, though neither is likely.

The Commission explained that its decision to “recommend to the Council to cancel the fine” was made in light of “the challenging economic environment, both countries’ reform efforts and their commitments to comply with the rules of the Stability and Growth Pact.”

The SGP rules mandate that the annual budget deficit of EU countries must be kept below 3 percent of GDP. Any country within the bloc that falls outside of that threshold can be fined up to 0.2 percent of GDP.

Spain and Portugal’s deficits last year hit 5.1 percent and 4.4 percent, respectively. But both countries had argued for the cancellation of any type of EU sanctions, which they said would be “unjustified” and “counter-productive.”

Instead of sanctioning the two countries, the Commission recommended “a new fiscal adjustment path” for both Madrid and Lisbon.

Under this arrangement, Portugal must eliminate its excessive deficit by 2016 and Spain by 2018, at the latest. The timeline “reflects the Commission’s prudent approach in the current environment,” it said in a press release.

The Commission also said it will decide on a second type of possible sanction that could lead to a suspension of EU funding for infrastructure projects in Spain and Portugal in the fall, in consultation with the European Parliament. To avoid funding cuts, both countries in principle must demonstrate “full compliance” with the SGP.

The cancelling of fines came as somewhat of a surprise. In recent days, Commission President Jean-Claude Juncker reportedly had been pushing to fine both countries, which would have been a first for the violation of the EU’s budgetary rules. Critics have accused the EU of lacking credibility for not enforcing its own rules in the past, including when France and Germany breached the budget deficit limit.

In a meeting that lasted longer than usual, POLITICO sources said a small number of commissioners argued for at least imposing a symbolic fine on Spain and Portugal. But the other commissioners didn’t agree, thanks to last-minute lobbying from German Finance Minister Wolfgang Schäuble.

At the press conference explaining the decision on Wednesday, Pierre Moscovici, the commissioner for economic affairs, said “even symbolic sanctions wouldn’t have allowed us to correct events in the past … the past is the past.”

His colleague, Valdis Dombrovskis, the Commission vice president for the euro, also noted that Spain and Portugal were both “coming out of a financial crisis … this is something which we need to take into account when assessing the past.”

Reactions to the Commission decision were mixed.

“This will strike some as a negative in terms of credibility, but the enforcement of the fiscal compact has always been political in nature, and the decision is a pragmatic one,” said Peter Ceretti, an analyst at the Economist Intelligence Unit. “Europe doesn’t need another crisis to deal with right now. Amid the migrant crisis, the terrorist threat, the Brexit vote, and rising populism, it doesn’t need a conflict over fiscal rules as well.”

However, Markus Ferber, a German member of the European Parliament and vice chair of its economic and monetary affairs committee, said “this is not only disappointing, but it destroys the confidence and credibility of our rules — it is a bad day for our common currency.” Ferber has long called for a strong-armed approach to EU countries that fail to balance their books, to ensure that the rules are taken seriously.

Clearly anticipating the criticism on their credibility, the commissioners tried to put on a positive spin. “This proves that we can be at the same time credible and understanding,” Moscovici said. “It’s not the end of the story. We will have to see what [Spain and Portugal’s] draft budgetary plans are for 2017. So credibility is fully there.”

EU countries must hand over their budget deficit data and economic plans to the Commission for close scrutiny by October 15. And when they do, some observers may shift their attention to France, which is also on the EU’s excessive deficit watch list.

But in the past, France has been accused of receiving preferential treatment. Earlier this year, Juncker suggested that France should not face punitive action for its inability to meet EU expectations, “because it is France.”

Juncker’s comments were heavily criticized by the likes of Ferber and Dutch Finance Minister and head of the Eurogroup of eurozone finance ministers Jeroen Djisselbloem, who warned that such a statement “really damages the credibility of the Commission.”

As for Ferber, he said: “I don’t like Juncker’s comments on France. The country is performing badly and will have to see the same treatment. Nothing in the rules allows for the differentiation of member states.”